Beng Soon Machinery Holdings Limited (HKG:1987) Shares May Have Slumped 26% But Getting In Cheap Is Still Unlikely

Beng Soon Machinery Holdings Limited (HKG:1987) shares have retraced a considerable 26% in the last month, reversing a fair amount of their solid recent performance. Still, a bad month hasn't completely ruined the past year with the stock gaining 32%, which is great even in a bull market.

In spite of the heavy fall in price, Beng Soon Machinery Holdings may still be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 33.4x, since almost half of all companies in Hong Kong have P/E ratios under 12x and even P/E's lower than 7x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

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For example, consider that Beng Soon Machinery Holdings' financial performance has been poor lately as its earnings have been in decline. One possibility is that the P/E is high because investors think the company will still do enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Beng Soon Machinery Holdings

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Beng Soon Machinery Holdings will help you shine a light on its historical performance.

How Is Beng Soon Machinery Holdings' Growth Trending?

The only time you'd be truly comfortable seeing a P/E as steep as Beng Soon Machinery Holdings' is when the company's growth is on track to outshine the market decidedly.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 33%. This means it has also seen a slide in earnings over the longer-term as EPS is down 69% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

In contrast to the company, the rest of the market is expected to grow by 21% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

In light of this, it's alarming that Beng Soon Machinery Holdings' P/E sits above the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

The Key Takeaway

Even after such a strong price drop, Beng Soon Machinery Holdings' P/E still exceeds the rest of the market significantly. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our examination of Beng Soon Machinery Holdings revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

You should always think about risks. Case in point, we've spotted 3 warning signs for Beng Soon Machinery Holdings you should be aware of, and 1 of them is a bit unpleasant.

If these risks are making you reconsider your opinion on Beng Soon Machinery Holdings, explore our interactive list of high quality stocks to get an idea of what else is out there.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.